U.S. freight railroads are usually identified as Class I, Class II or Class III. That can be helpful for several reasons.

The Surface Transportation Board (STB), an independent federal agency that oversees the economic regulation of freight railroads and deals with issues related to railroad rates and rail service, has divided the freight railroads into three categories based on their operating revenue. According to the American Short Line and Regional Railroad Association (ASLRRA), those categories are: 

Class I railroads: annual operating revenue over $489.9 million.
Class II railroads: annual operating revenue between $39.2 million and $489.9 million.
Class III railroads: annual operating revenue of less than $39.2 million.

Categorizing freight railroads into different classes is useful for regulatory reasons.

For instance, if a Class II railroad and a Class III railroad want to merge, they have fewer benchmarks to reach to gain regulatory approval from the STB than two Class I railroads seeking to merge. Because of their size, two Class I railroads must ensure that their operations and networks complement each other. The Federal Railroad Administration (FRA) may also want the two railroads to file safety integration plans.

Class I railroads are held to a higher regulatory standard. They must submit reports to STB detailing financial and operating statistics, including employment and traffic data. The board uses this information to produce monthly and quarterly employment reports, annual wage statistics of those railroads, and quarterly rail fuel surcharge reports. 

To learn more about what regulatory requirements Class I railroads must follow, go here.

Knowing what class a railroad falls under also helps stakeholders understand what government funding is available for infrastructure projects. 

According to FRA, the nearly $80 billion freight rail industry is made up of almost 14,000 route miles and consists of seven Class I railroads, 22 regional railroads and 584 short line railroads. The regional and short line railroads make up the Class II and Class III railroads.

Unlike other transportation industries, the major U.S. freight railroads are financially responsible for maintaining their own infrastructure.

Smaller railroad companies, such as the Class II railroads and Class III railroads, may be eligible for federal tax credits aimed at infrastructure improvements to help pay for maintenance, or they may take part in state or federal grants when working with public partners

Meanwhile, the larger railroads spend nearly $25 billion annually to maintain their networks and ensure there is enough capacity to handle all the volume that travels via their tracks, according to FRA. However, Class I railroads may also participate in state or federal grants if they work with partners that are eligible for government funding.

The railroad classes also serve as an unofficial shorthand for customers, local partners and government officials in understanding whom a freight railroad might serve. Class II and Class III railroads are known as short line or regional railroads that function as the first mile and last mile in a supply chain. They may serve rural communities or ports, and they connect or interchange with the larger Class I railroads. Some are family-owned and maintain close relationships with customers, whereas others may be part of a company that oversees several short line railroads across the U.S. and Canada. The length of their networks can also be short: Class III railroads have a median length of haul of 15 miles, according to ASLRRA.

In contrast, the networks of Class I railroads span thousands of miles across several states, and their volume capacity is much greater than those of the Class II and III railroads. Their public nature — six of the seven Class I railroads are publicly traded — also enables them to be more visible proponents — or targets — of issues that might affect the freight rail industry as a whole.

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Click here for more FreightWaves articles by Joanna Marsh.

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